August 09, 2012

Black Swans Explained

Nassin Taleb's bestseller "The Black Swan" popularized the notion of statistically improbable outliers. Benoit Mandelbrot's "The Misbehavior of Markets" explained the math behind black swans and took away the mystery.

Studies have shown that the more often we succeed in risky behavior the more likely we are to repeat it. "For ego protection reasons, we like to assume that past events are a product of what we controlled rather than chance", according to Georgetown business professor Catherine Tinsley (Wired Aug 2012). Effectively, success encourages a tendency to ignore the black swan event(s). However, neuroscience may explain this irrational behavior.

In John Coates new book, "The Hour between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust", the "irrational" exhuberance of financial traders is explained. "The euphoria, overconfidence and heightened appetite for risk that grip traders during a bull market may result from a phenomenon known in biology as the ‘winner effect.’" The winner effect is brought on by an increased flow of testosterone. Effectively human biology may take precedence over the more rational analysis Mandelbrot made possible.

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Nassin Taleb's bestseller "The Black Swan" popularized the notion of statistically improbable outliers. Benoit Mandelbrot's "The Misbehavior of Markets" explained the math behind black swans and took away the mystery.

Studies have shown that the more often we succeed in risky behavior the more likely we are to repeat it. "For ego protection reasons, we like to assume that past events are a product of what we controlled rather than chance", according to Georgetown business professor Catherine Tinsley (Wired Aug 2012). Effectively, success encourages a tendency to ignore the black swan event(s). However, neuroscience may explain this irrational behavior.

In John Coates new book, "The Hour between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust", the "irrational" exhuberance of financial traders is explained. "The euphoria, overconfidence and heightened appetite for risk that grip traders during a bull market may result from a phenomenon known in biology as the ‘winner effect.’" The winner effect is brought on by an increased flow of testosterone. Effectively human biology may take precedence over the more rational analysis Mandelbrot made possible.